Incomplete Transmission: Despite the RBI increasing the repo rate by 250 basis points, banks have only raised the weighted average lending rate on fresh loans by 185 basis points, indicating incomplete transmission.

EBLR vs. MCLR: Loans tied to the External Benchmark-based Lending Rate (EBLR) quickly adjust with the repo rate, while those tied to the Marginal Cost of Funds-based Lending Rate (MCLR) lag behind. For instance, between May 2022 and March 2024, the median one-year MCLR only rose by 155 basis points, compared to a 250 basis point increase in the repo rate.

Complex Pricing Mechanism: MCLR-based loans factor in the bank’s cost of deposits and other margins, making rate adjustments more complex and slower than EBLR-linked loans.

Competition Concerns: Banks are cautious in raising MCLR rates due to fears of losing loan accounts to competitors, affecting their market share. This hesitance impacts the rate adjustment pace.

Selective Deposit Rate Increases: Banks have raised rates mainly for short-term deposits, affecting the cost basis for MCLR and subsequently delaying the transmission to MCLR-linked loan rates.

Ongoing Transmission: The RBI acknowledges that the transmission of rate changes to lending rates is still in progress, indicating a gradual process.

Goal of Fuller Transmission: The central bank is committed to ensuring a fuller transmission of policy actions, highlighting its efforts to make interest rate changes effectively impact lending rates.

Anchoring Expectations: The aim of anchoring household inflation expectations through effective rate transmission is indeed a part of the RBI’s strategy, as outlined by the Deputy Governor.